The U.S. microgrid market is growing, with a record 546 microgrids installed during 2019. Most of those projects were below 5 megawatts. This is a continuation of the trend starting in 2017: The number of smaller, more modular projects has consistently grown each year.
As the market has grown, it has also attracted increasingly diverse financiers, according to a new Wood Mackenzie report.
As costs have gone down, investor interest has gone up
Increasing system standardization and the declining costs of energy resources have reduced development costs and boosted the growth of small microgrids.
Standardized systems remove the need for custom builds, so less time is required for construction. That’s also made it easier for financiers to evaluate multiple projects: Due-diligence costs are lower for a portfolio of locations that run similar technologies and have the same business model as opposed to a portfolio comprising multiple customized systems with different business models.
The investor landscape is diverse and will continue to expand
An increasingly broad array of financiers with patient capital are investing in U.S. microgrids, ranging from investor-owned utilities to private equity groups. In the next two years, WoodMac forecasts that more private equity players will enter the market, especially those with experience in infrastructure and oil and gas. Many of these firms are looking for above-market returns with levels of stability comparable to those historically associated with infrastructure investments.
In addition, more utilities will want to leverage their unregulated business arms to own and operate microgrids. These firms are interested in supporting customers as they seek resilience for their operations and electrify heating and transportation.
The oil majors, as well as multinational corporations such as Siemens, are also interested in establishing themselves as the vendors to help customers navigate this transition.
Resilience is a key incentive
Hurricanes Isaias and Laura hit the U.S. Gulf Coast and Northeast in August, leaving over 1.5 million people without power. Faced with extreme weather events like these, it’s no surprise that 84 percent of third-party investors are primarily motivated by resilience and reliability.
The central value proposition for many third-party-owned microgrids is saving on the costs of the traditional backup diesel generators, rentals or uninterruptible power supply systems that are normally required in the event of a blackout. Microgrids' ability to compete with traditional backup solutions has been enabled by vendors providing financing options that require no or limited upfront capital. This type of financing allows customers to secure the benefits of a microgrid without a significant upfront expenditure.
With events like the recent blackouts in California likely to increase in frequency and magnitude, Wood Mackenzie sees the demand for modular microgrids using third-party financing as being very likely to increase.
Isaac Maze-Rothstein is Wood Mackenzie's microgrid analyst and part of the grid edge team. He is the author of the report Microgrid Finance 2020: The Emergence of the Energy-as-a-Service Business Model.